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Friday, March 25, 2016

Justin Gifu Lin — Why China Can Grow According to Plan

One of the key questions about China’s 13th five-year plan, which covers the period from 2016 to 2020, is whether the country can achieve its target of doubling its GDP and average rural and urban household income from their 2010 levels. Despite major challenges, there is good reason to believe that it can.…

Reasonable analysis based on historical comparisons but then this:

This external drag [affecting exports] is likely to continue, as politics in developed countries impedes efforts to implement the structural reforms – such as reducing wages, lowering social benefits, financial deleveraging, and consolidating budget deficits – needed to revive economic growth. Indeed, like Japan beginning in 1991, much of the developed world risks lost decades.

Doesn’t see that this is a demand issue and that austerity will lead to debt deflation and increasing stagnation.

Justin Gifu Lin | Professor and Honorary Dean of the National School of Development, Peking University, the founding director of the China Center for Economic Research, and a former chief economist and senior vice president at the World Bank

4 comments:

Personal debt in China has gone through the roof. That's always the achilles heel of any economy.

The state can invest many trillions in infrastructure and create a social safety net, which is badly lacking, and move to a domestic consumption rather than an export led economy. So there's huge economic space for China going forward, but the personal indebtedness is going to be very troublesome in the next few years and that's going to be a problem for China's growth rates given that the economies of rest of the world are is such a bad state.

Not unsustainable personal debt, as post-2008 has proven. The personal debt in China looks unsustainable. Otherwise, China is on a much better economic road than anywhere else, especially given the low base they started from. It's this personal debt problem that's going to start to hurt, on top of the fact that the Chinese save so much because there is no social security safety net.

The only way the Chinese people are going to get out of this personal indebtedness problem is for the state to go into overdrive and allow people to delever so that they don't have to face the problems high personal debts have always caused. The only debt that is ever a problem is personal.

Private debt issues are simple to solve through write downs, restructuring, and liquidity provision. The problem is not private debt per se but rather creditor demands that are supported by state power.

Capitalist countries are willing to blow up their economies to support creditor demands. I doubt China will adopt that stance.